diff --git a/src/hotspot/share/runtime/thread.cpp b/src/hotspot/share/runtime/thread.cpp
index 7f9da69ab5e..1dfcae87bad 100644
--- a/src/hotspot/share/runtime/thread.cpp
+++ b/src/hotspot/share/runtime/thread.cpp
@@ -1491,8 +1491,8 @@ void WatcherThread::run() {
           os::die();
         }
 
-        // Wait a second, then recheck for timeout.
-        os::naked_short_sleep(999);
+        // Wait a bit, then recheck for timeout.
+        os::naked_short_sleep(250);
       }
     }
 
diff --git a/src/hotspot/share/utilities/vmError.cpp b/src/hotspot/share/utilities/vmError.cpp
index 4c0b285044f..350498181d2 100644
--- a/src/hotspot/share/utilities/vmError.cpp
+++ b/src/hotspot/share/utilities/vmError.cpp
@@ -1,5 +1,6 @@
 /*
  * Copyright (c) 2003, 2019, Oracle and/or its affiliates. All rights reserved.
+ * Copyright (c) 2023, Red Hat, Inc. and/or its affiliates.
  * DO NOT ALTER OR REMOVE COPYRIGHT NOTICES OR THIS FILE HEADER.
  *
  * This code is free software; you can redistribute it and/or modify it
@@ -1689,42 +1690,71 @@ void VMError::show_message_box(char *buf, int buflen) {
   } while (yes);
 }
 
-// Timeout handling: check if a timeout happened (either a single step did
-// timeout or the whole of error reporting hit ErrorLogTimeout). Interrupt
-// the reporting thread if that is the case.
+// Fatal error handling is subject to several timeouts:
+// - a global timeout (controlled via ErrorLogTimeout)
+// - local error reporting step timeouts.
+//
+// The latter aims to "give the JVM a kick" if it gets stuck in one particular place during
+// error reporting. This prevents one error reporting step from hogging all the time allotted
+// to error reporting under ErrorLogTimeout.
+//
+// VMError::check_timeout() is called from the watcher thread and checks for either global
+// or step timeout. If a timeout happened, we interrupt the reporting thread and set either
+// _reporting_did_timeout or _step_did_timeout to signal which timeout fired. Function returns
+// true if the *global* timeout fired, which will cause WatcherThread to shut down the JVM
+// immediately.
 bool VMError::check_timeout() {
 
+  // This function is supposed to be called from watcher thread during fatal error handling only.
+  assert(VMError::is_error_reported(), "Only call during error handling");
+  assert(Thread::current()->is_Watcher_thread(), "Only call from watcher thread");
+
   if (ErrorLogTimeout == 0) {
     return false;
   }
 
-  // Do not check for timeouts if we still have a message box to show to the
-  // user or if there are OnError handlers to be run.
-  if (ShowMessageBoxOnError
-      || (OnError != NULL && OnError[0] != '\0')
-      || Arguments::abort_hook() != NULL) {
-    return false;
-  }
+  // There are three situations where we suppress the *global* error timeout:
+  // - if the JVM is embedded and the launcher has its abort hook installed.
+  //   That must be allowed to run.
+  // - if the user specified one or more OnError commands to run, and these
+  //   did not yet run. These must have finished.
+  // - if the user (typically developer) specified ShowMessageBoxOnError,
+  //   and the error box has not yet been shown
+  const bool ignore_global_timeout =
+      (ShowMessageBoxOnError
+            || (OnError != NULL && OnError[0] != '\0')
+            || Arguments::abort_hook() != NULL);
 
-  const jlong reporting_start_time_l = get_reporting_start_time();
   const jlong now = get_current_timestamp();
-  // Timestamp is stored in nanos.
-  if (reporting_start_time_l > 0) {
-    const jlong end = reporting_start_time_l + (jlong)ErrorLogTimeout * TIMESTAMP_TO_SECONDS_FACTOR;
-    if (end <= now) {
-      _reporting_did_timeout = true;
-      interrupt_reporting_thread();
-      return true; // global timeout
+
+  // Global timeout hit?
+  if (!ignore_global_timeout) {
+    const jlong reporting_start_time = get_reporting_start_time();
+    // Timestamp is stored in nanos.
+    if (reporting_start_time > 0) {
+      const jlong end = reporting_start_time + (jlong)ErrorLogTimeout * TIMESTAMP_TO_SECONDS_FACTOR;
+      if (end <= now && !_reporting_did_timeout) {
+        // We hit ErrorLogTimeout and we haven't interrupted the reporting
+        // thread yet.
+        _reporting_did_timeout = true;
+        interrupt_reporting_thread();
+        return true; // global timeout
+      }
     }
   }
 
-  const jlong step_start_time_l = get_step_start_time();
-  if (step_start_time_l > 0) {
+  // Reporting step timeout?
+  const jlong step_start_time = get_step_start_time();
+  if (step_start_time > 0) {
     // A step times out after a quarter of the total timeout. Steps are mostly fast unless they
     // hang for some reason, so this simple rule allows for three hanging step and still
     // hopefully leaves time enough for the rest of the steps to finish.
-    const jlong end = step_start_time_l + (jlong)ErrorLogTimeout * TIMESTAMP_TO_SECONDS_FACTOR / 4;
-    if (end <= now) {
+    const int max_step_timeout_secs = 5;
+    const jlong timeout_duration = MAX2((jlong)max_step_timeout_secs, (jlong)ErrorLogTimeout * TIMESTAMP_TO_SECONDS_FACTOR / 4);
+    const jlong end = step_start_time + timeout_duration;
+    if (end <= now && !_step_did_timeout) {
+      // The step timed out and we haven't interrupted the reporting
+      // thread yet.
       _step_did_timeout = true;
       interrupt_reporting_thread();
       return false; // (Not a global timeout)
diff --git a/test/hotspot/jtreg/runtime/ErrorHandling/TimeoutInErrorHandlingTest.java b/test/hotspot/jtreg/runtime/ErrorHandling/TimeoutInErrorHandlingTest.java
index 51ae88f31c5..dd2c782e035 100644
--- a/test/hotspot/jtreg/runtime/ErrorHandling/TimeoutInErrorHandlingTest.java
+++ b/test/hotspot/jtreg/runtime/ErrorHandling/TimeoutInErrorHandlingTest.java
@@ -1,5 +1,6 @@
 /*
- * Copyright (c) 2017, Oracle and/or its affiliates. All rights reserved.
+ * Copyright (c) 2023, Red Hat, Inc. and/or its affiliates.
+ * Copyright (c) 2017, 2022, Oracle and/or its affiliates. All rights reserved.
  * DO NOT ALTER OR REMOVE COPYRIGHT NOTICES OR THIS FILE HEADER.
  *
  * This code is free software; you can redistribute it and/or modify it
@@ -25,6 +26,9 @@
 import java.io.File;
 import java.io.FileInputStream;
 import java.io.InputStreamReader;
+import java.util.ArrayList;
+import java.util.Collections;
+import java.util.List;
 import java.util.regex.Pattern;
 
 import jdk.test.lib.process.OutputAnalyzer;
@@ -32,7 +36,7 @@
 import jdk.test.lib.process.ProcessTools;
 
 /*
- * @test
+ * @test id=default
  * @bug 8166944
  * @summary Hanging Error Reporting steps may lead to torn error logs
  * @modules java.base/jdk.internal.misc
@@ -41,6 +45,16 @@
  * @author Thomas Stuefe (SAP)
  */
 
+/*
+ * @test id=with-on-error
+ * @bug 8303861
+ * @summary Error handling step timeouts should never be blocked by OnError etc.
+ * @modules java.base/jdk.internal.misc
+ * @library /test/lib
+ * @requires (vm.debug == true) & (os.family != "windows")
+ * @run driver TimeoutInErrorHandlingTest with-on-error
+ */
+
 public class TimeoutInErrorHandlingTest {
 
 
@@ -67,14 +81,28 @@ public static void main(String[] args) throws Exception {
          * little timeout messages to see that repeated timeout handling is basically working.
          */
 
-        ProcessBuilder pb = ProcessTools.createJavaProcessBuilder(
-            "-XX:+UnlockDiagnosticVMOptions",
-            "-Xmx100M",
-            "-XX:ErrorHandlerTest=14",
-            "-XX:+TestUnresponsiveErrorHandler",
-            "-XX:ErrorLogTimeout=16", // 16 seconds big timeout = 4 seconds per little timeout
-            "-XX:-CreateCoredumpOnCrash",
-            "-version");
+        boolean withOnError = false;
+
+        if (args.length > 0) {
+            switch (args[0]) {
+                case "with-on-error": withOnError = true; break;
+                default: throw new RuntimeException("Invalid argument " + args[1]);
+            }
+        }
+
+        List<String> arguments = new ArrayList<>();
+        Collections.addAll(arguments,
+                "-XX:+UnlockDiagnosticVMOptions",
+                "-Xmx100M",
+                "-XX:ErrorHandlerTest=14",
+                "-XX:+TestUnresponsiveErrorHandler",
+                "-XX:ErrorLogTimeout=" + ERROR_LOG_TIMEOUT,
+                "-XX:-CreateCoredumpOnCrash");
+        if (withOnError) {
+            arguments.add("-XX:OnError=echo hi");
+        }
+        arguments.add("-version");
+        ProcessBuilder pb = ProcessTools.createJavaProcessBuilder(arguments);
 
         OutputAnalyzer output_detail = new OutputAnalyzer(pb.start());
 
@@ -82,8 +110,10 @@ public static void main(String[] args) throws Exception {
         output_detail.shouldMatch("# A fatal error has been detected by the Java Runtime Environment:.*");
         output_detail.shouldMatch("# +(?:SIGSEGV|SIGBUS|EXCEPTION_ACCESS_VIOLATION).*");
 
-        // VM should have been aborted by WatcherThread
-        output_detail.shouldMatch(".*timer expired, abort.*");
+        // Unless we specified OnError, VM should have been aborted by WatcherThread
+        if (!withOnError) {
+            output_detail.shouldMatch(".*timer expired, abort.*");
+        }
 
         // extract hs-err file
         String hs_err_file = output_detail.firstMatch("# *(\\S*hs_err_pid\\d+\\.log)", 1);